India is on the cusp of major economic growth, making it an attractive location for investment. Several factors contribute to this optimistic view: India’s large and growing middle class, technological innovations and growth-oriented regulatory changes are promising signs. The country’s economy grew by an impressive 9.1% in 2021. Many expect the trend to continue. Morgan Stanley projects that India will “become the world’s third-largest economy by 2027.”
The future is not necessarily clear. A decade ago, many analysts expected to follow in the steps of China’s explosive growth, but this never happened. Sceptics argue that India’s current development did not come from sustained long-term development, but merely its recovery from the economic downturn caused by the Covid pandemic.
But there are good reasons to think that the trend is well-founded and here to stay. India has a young, growing and increasingly educated workforce; and an expanding consumer market. It has the makings not of a temporary boom but of a sustained growth with a solid foundation.
Strong bones, strong growth
According to the World Bank’s latest India Development Update, titled “Navigating the Storm,” India’s economy has demonstrated continuing resilience despite a troubling external environment. “A tightening global monetary policy cycle, slowing global growth and elevated commodity prices,” the report states, are expected to impact India. Nevertheless, “the economy is relatively well positioned to weather global spillovers compared to most other emerging markets.”
The update expects India to “experience lower growth in the 2022-23 financial year compared to 2021-22,” due to the aforementioned difficulties. Despite these obstacles, however, the World Bank forecasts a substantial increase in India’s gross domestic product (GDP). This positive outlook is primarily attributed to “robust domestic demand” within the country. The World Bank modified its GDP forecast for the 2022-23 fiscal year to 6.9% from 6.5%, noting a serious upturn during the second quarter (July–September) of this period.
In other words, India is not merely experiencing the good fortune of a post-pandemic bounceback. It was able to weather the pandemic and recover well because it has a strong foundation. The update quoted Auguste Tano Kouame, the World Bank’s Country Director in India, who emphasized that “India’s economy has been remarkably resilient to the deteriorating external environment, and strong macroeconomic fundamentals have placed it in good stead compared to other emerging market economies.”
There are a number of factors that explain India’s economic resilience and its prospects for strong future growth:
1. Large consumer market. India’s population is over 1.4 billion,making it the most populous country on Earth. This vast
consumer base offers creates a large domestic demand for
products and services, even before the export market is
considered. 2. Economic growth potential. India has a dynamic workforce that is
forming a growing middle class that is filling India’s cities.
These factors ensure that India’s large population translates into
an active consumer base and not economic deadweight. 3. Demographic advantage. India has a young population, with a
significant proportion of its citizens under age 35. These young
people are entering the workforce in droves. 4. Improving business environment. The Indian government has
implemented various reforms to improve the ease of doing
business. Initiatives such as the Goods and Services Tax (GST)
and the Insolvency and Bankruptcy Code (IBC) have
streamlined processes, reduced bureaucracy and increased
transparency, making it easier for companies to operate in India. 5. Technological capabilities. India has a thriving technology sector
and is known for its expertise in information technology and
software services. It is home to a large number of skilled IT
professionals, making it an inviting destination for tech-related
development. 6. Infrastructure development. India has been investing heavily in
infrastructure development, including transportation, logistics
and telecommunications. These investments are crucial for
supporting business activities and improving connectivity
within the country. 7. Government initiatives and incentives. The central government has
launched several initiatives and incentive programs to attract
foreign direct investment (FDI). Programs such as “Make in
India” and “Digital India” aim to promote manufacturing,
innovation and technology adoption by offering tax incentives,
subsidies and streamlined regulatory processes. 8. Sector diversity. India has a highly diverse economy. It does not
rely on one major export or sector but has well-developed
manufacturing, healthcare, renewable energy, e-commerce
and financial services.
India still has some things to change
These factors, however promising, might not be enough on their own. Becoming the world’s third-largest economy by 2027 would require sustained growth, structural reforms and effective implementation of crucial policies. These policies would promote investment, entrepreneurship, and job creation.
Bloomberg columnist Andy Mukherjee argues that although India may benefit from adopting a strategy in which it seeks to imitate China’s export and manufacturing-led growth, this may not be sufficient to address the slowdown driven by the pandemic’s impact on sectors like education and healthcare. The pandemic has significantly disrupted these areas, leading to learning loss, reduced access to quality education, strained healthcare infrastructure and increased healthcare expenses. Mukherjee suggests that these challenges are more pressing compared to the establishment of new supply chains through subsidies and high tariff barriers, which he views as “a long-term gamble.”
What will really help India in the long term are common-sense policies that make it a more attractive destination for investment and an easier place to work and do business overall. Bureaucratic red tape, infrastructure gaps in certain regions, regulatory complexities and cultural diversity can be obstacles to growth. I believe these key areas should receive the primary focus:
1. Investment promotion. Actively promote investment opportunitiesin India through marketing campaigns, investment summits,
and roadshows. Highlight the country’s strengths, such as its
large consumer market, skilled workforce and growing middle
class. 2. Skill development. Invest in education and skill development
programs to ensure a talented workforce. Promote vocational
training and collaborate with industries to align skills with
market demands. India currently has the second-largest higher
education system on Earth and has a high potential for further
growth. 3. Tax Reforms. Implementing a transparent and investor-friendly tax
regime can boost investments. Simplify tax laws, reduce tax rates
and provide clarity on tax regulations to encourage both
domestic and foreign investors. In May 2023, the Indian
government reevaluated its angel tax provision for investors in
start-ups. It proposed changes to liberalize the system, which I
believe should be implemented. The proposed legislation would
strengthen India’s startup ecosystem by providing more liberty
to both resident and non-resident investors. 4. Investor Protection. Strengthen investor protection mechanisms
and establish robust dispute resolution systems. Ensure fair and
timely resolution of disputes to build trust among investors. 5. Collaborate with International Partners. Forge partnerships with
more international organizations and countries to facilitate
knowledge exchange, investments and technology transfers.
Foster a collaborative approach to leverage global expertise and
resources.
If India is to become the most appealing emerging investment it can be, it is essential to have a long-term perspective and consistently work towards implementing and improving growth-oriented policies. By taking action, the nation may shake off past setbacks and emerge as the planet’s third-largest economic power.
[Lee Thompson-Kolar and Anton Schauble edited this piece.]
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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